Archive - Jun 2012

...But at least housing has bottomed (it so difficult to even write that with a straight face). Our two economic indicators today continued the tradition of the last 2 months and both missed, with the Richmond Fed sliding to -3 on expectations of a +2 print, and down from +4: the lowest number since October 2011. And the other data point hinting to the Fed that it is needs to do something now, was the June Consumer Confidence number, which was lower 4 months in a row (for the first time since May 2008), and which declined from 64.4 to 62.0, missing expectations of 63.0, and the lowest since January, undoing all transitory, S&P500 driven gains of the year.

We explained it all in painful detail in January. We refreshed two weeks ago ("The Spanish 'Legal-Arbitrage' Bond Trade Is On") and then one week prior ("Spanish "Litigation Arb" Trade Is The New Killing It"). Now, finally, Citi's Matt King has jumped on board.

What if you only has three more days to live?

The difference between senior credit risk and subordinated credit risk for Italian and Spanish banks has risen dramatically in the last few days (since we posted the macro 'bail-in' trade) with Spanish banks the hardest hit but all wider. Senior credit for these banks remains in its relatively wide range of the last few weeks but the subordinated credit risk has broken out to the upside (an average over 950bps across the eight names in our index) as the market prices in the endgame of any dilutive 'burden-sharing' endgame as a cram-up of sub (and perhaps even some senior) bank credit. Perhaps spooked a little by comments from de Guindos on 'preferreds' today, it is the Spanish Cajas that are worst with Caja de Ahorros del Mediterraneo +185bps at 1455bps (equivalent) today. In the meantime, the LTRO Stigma (the spread between LTRO-encumbered and non-LTRO banks) has pushed back over 180bps to record wides as the LTRO-driven symbiotic contagion unintended consequence of banking and sovereign stress reinforce one another more and more.

Remember April? That's when the US stock market peaked. It also occurred right after March when the peak effect of the record warm winter weather hit, resulting in peak forward pulled demand. Sure enough, today's Case Shiller index confirmed that: in April the Top 20 SA Composite Index rose by a respectable 0.67%: not a bad sign considering until February it had declined for 20 consecutive months. The issue, however, is that the April increase was already lower than the March revision, which in turn had seen a 0.73% increase which was the highest since August 2009. Which means precisely what the chart below indicates: a continuous lower trendline in home prices, with delayed monthly noise based on what the S&P does. And with the S&P plunging in May, expect a comparable response in housing price when the data is finally released. At the end of July. By then, however, we may have bigger issues. Finally, those hoping that the Fed is looking at this indicator as permissive of more negative feedback easing, will be disappointed: the Fed will need to see at least one full period of a sustained decline. So far not so good.

Now even the beggars (Gollum, Barosso, Juncker, Monti and lately Draghi) appear to have given up hope they can be choosers. While on Monday the press was abuzz with speculation that Van Rompuy was about to unveil yet another epic (and completely impractical) plan of future Eurozone integration, the FT now reports that just 24 hours later, "Herman Van Rompuy, president of the European Council, on Tuesday published a significantly scaled-back version of the highly-anticipated plan for the future of the eurozone to be debated at a summit meeting this week. The seven-page plan, which calls for progress towards commonly issued eurozone bonds and the eventual establishment of central EU treasury, is less ambitious and less detailed than earlier drafts, including a 10-page version circulated as recently as Monday." At this rate, the final draft will consist of three pages... of blank checks. And the glitch in the matrix will be complete if the first entity this plan is presented to will be US congress. Which would be oddly fitting: after all someone has to pay for other people's socialism.

There are those that wait and hope and pray that there will be Divine Intervention. They cling to the belief that Germany, in the end, will back down and retreat and agree to bail everyone out. Germany’s GDP is only $3.2 trillion and this expectation, believed in by more than a few, is not only ridiculous in my opinion but a mathematical impossibility. If you consider the current EFSF program and that $300 billion has already been used for Greece, Ireland and Portugal and that this new assistance program for Spain will take it up to $425 billion you begin to get some sense of the enormity of the problem. The U.S. equivalent then for the total EFSF would be $4.318 trillion or 30.4% of America’s total GDP which would swamp our nation.  This is why when I listen to Frau Merkel say “Nein;” I believe her! It is the twentieth Summit. I predict it will be the twentieth time that almost nothing is accomplished. The beggars want to be the choosers and Germany and the richer nations will hardly allow for that.

GS just did what it does best: pulled the rug from under its most troubled peer: "We are downgrading MS to Neutral and removing shares from the America’s Conviction List. Since being added to the Americas Conviction List on January 29, 2012, MS shares are down 27% vs. flat for the S&P 500. Over the past 12 months, MS shares are down 39% vs. the S&P 500 up 4%. When we added shares to the Conviction List, we noted that MS had addressed a number of legacy issues including (1) the conversion of the MUFG preferred stock to common to bolster common equity capital ratios, (2) elimination of the CIC preferred dividend, (3) removal of the MBIA relationship//hedge overhang, (4) write-down of legacy real estate assets, (5) elimination of non-core asset management businesses, and (6) near-completion of the  integration of Smith Barney and Morgan Stanley Wealth Management. While that all still holds true today and should be beneficial towards long-term “normalized” returns, we believe several capital market overhangs will reduce out-year earnings visibility and cap near-term outperformance. While too soon to tell how counterparties will react to a new capital market ratings distribution post-Moody’s, this cycle has proven that banks with the largest increase in funding spreads have generally lost fixed income trading market share. In addition, with a number of global macro uncertainties likely to weigh on capital markets activity for the foreseeable future, MS has outsized exposure here as well....we are lowering our 12-month price target for MS to $16 (from $20) based on 0.6X TBV (from 0.7x) to reflect challenged near-term earnings power."

Capitalism at its best: kick 'em while they're down.

Some people know Banca Monte dei Paschi di Siena as one of the biggest banks in Italy (lately best known for being either halted down, about 90% of the time, or up, the remainder) with 3,000 branches, 33,000 employees and 4.5 million customers. Others know it for being the world's oldest surviving bank, founded in 1472 by the magistrate of the then city-state of Siena. Most will henceforth know it as the first Italian bank bailed out in 2012 using the old 2009 ponzi scheme known as "Tremonti bonds", whereby the bank sells bonds to a guaranteed buyer - the Italian government - receiving critical cash to continue operating in exchange for, well, promises, and sharing its balance sheet with the much more "viable" sovereign, whose bonds were trading above 6% at last check. The initial bailout bid: €1 billion in Tremonti bonds with speculation the number will be realistically up to €4 billion. The final number: much, much higher, but it likely won't be known for at least days. Which incidentally is an event which was largely expected. Recall on June 13 we wrote: "Forget Three Months: Italy May Have Two Weeks Tops, As "It Already Is Where Spain Is Heading." It is now 13 days later and the bailouts have begun.

Talks are already underway of suspending the Schengen agreement and implementing border and capital controls. The Schengen agreement and freedom across borders was at the very basis of the Eurozone. And now the political elite want to suspend this?

Since the last Greek FinMin came and went before anyone could even learn how many syllables are in his last name, here is an advance peek at the man who is tasked with the world's worst transitory job imaginable: that of being the new Greek finance minister. His complete profile below is courtesy of Athens News. Feel free not to learn it by heart: something tells us when he too sees the inside of the Greek finance ministry he too may developed a mysterious illness and be promptly "replaced."

Turkey raised its reported gold holdings by another 2% in the month of May. Turkey’s gold holding rose by 5.7 tonnes in May to total 245 tonnes, International Monetary Fund data showed, making it the latest in a string of countries to increase gold bullion reserves this year. Turkey has allowed banks to hold more of their reserves in gold to provide extra liquidity. The central bank this month raised the proportion of reserve requirements that can be held in foreign exchange to 50 percent from 45 percent, while the limit for gold was increased to 25 percent from 20 percent. The changes will add as much as $2.2 billion to gold reserves. Gold accounts for about 9.1 percent of Russia’s total reserves, 5.1 percent of Ukraine’s and 15 percent of Kazakhstan’s, according to the World Gold Council. That compares with more than 70 percent for the U.S. and Germany, the biggest bullion holders, according to Bloomberg figures. Kazakhstan plans to raise the amount of gold it holds as part of its reserves to 20 percent, Bisengaly Tadzhiyakov, deputy chairman of the country’s central bank, said earlier this month.

• On the continuing fraud that is Liebor: Libor Guardians Said to Resist Changes to Broken Rate (Bloomberg)
• Bank bailout to spark firesale of corporate Spain (Reuters) with Goldman and China just waiting
• EU Could Rewrite Eurozone Budgets (FT) but it won't because Germany will just say Nein again
• Congress Said to Delay Automatic Budget Cuts Until March (Bloomberg)
• China Says June Trade Improving in Sign Slowdown Stabilizing (Bloomberg)
• Biggest U.S. Banks Curb Loans as Regional Firms Fill Gap (Bloomberg)
• New York Fed Sells $4bn in Mortgage Debt (FT)
• Julian Assange’s fall from the heavens (Reuters)
• Wheeler to Lead N.Z. Central Bank as Kiwi Hits Exports: Economy (Bloomberg)
• Japan Lower House Passes Sales Tax Bill as Vote Divides DPJ (Bloomberg)

Not much to add to Reuters summary of the overnight Spanish bill auction. The good news: the country that is not Uganda sold €3.08 billion compared to a range sought of €2-3 billion. The bad news: the price paid to sell this debt more than makes up for any optics that this was a good deal. "Spain's short-term borrowing costs nearly tripled at auction on Tuesday, underlining the country's precarious finances as it struggles against recession and juggles with a debt crisis among its newly downgraded banks. The yield paid on a 3-month bill was 2.362 percent, up from just 0.846 percent a month ago. For six-month paper, it leapt to 3.237 percent from 1.737 percent in May... Spain sold 3.08 billion euros of its short-term debt on Tuesday, slightly above its target amount, even as the Treasury paid the highest rates to sell the paper since November and met with falling demand from the country's struggling banks. The Treasury sold 1.6 billion euros of a 3-month bill, and 1.48 billion euros of a 6 month bill, which together was just above the 2-3 billion euro target set. The Treasury has overshot its sales target in recent auctions, showing it still is capable of selling its debt even if has to rely on domestic banks to do so as international investors avoid Spanish debt." Here's a hint to whoever is pretending to be in charge of Spanish finances: selling more debt than the "max" just to show you still have bond market access (i.e., debt bought by just downgraded Spanish banks) while paying ridiculous interest on this "optical success" is about the dumbest thing a broke country can do. But who are we to judge. We will leave that to the bond market. Below we show the yield on the Spanish 10 Year, which in two days has retraced the entire move tighter in the past week.